Pixar

"I reasoned that around 1991, Steve was ready to let go of Pixar. He had never set out to build an animation company. In 1986, when he took control of Pixar, Steve dreamed of building a technology company, a graphics powerhouse that would stun the world with machines that could do computer imagery like no other. Storytelling was an afterthought, a way to demonstrate the technology. The hopes of that graphics company had rested in part on the Pixar Image Computer, which had failed. By 1991, that division of Pixar had been shut down completely."

"“We should go for it,” he said. “Pixar worked years to develop this technology. Why should they use it for free? We should shut down their infringing products.” “We’d be better off charging license fees than trying to shut them down,” I suggested. “Those products are not really threatening Pixar’s business.” “How much can we get from licensing?” Steve wondered. “These are huge companies and our patents are central to their graphics businesses. It’s worth fifty million at least.” “I don’t disagree,” I said. It was true; we might have been able to earn license fees of that magnitude. But my years as a lawyer told me that Microsoft and Silicon Graphics wouldn’t pay those kinds of numbers without a big court battle. That could take years and cost millions. “We’re better off making it easier for them to make a deal than to go to war for every penny that we think we’re entitled to,” I told Steve. “The biggest benefit to Pixar is to make this quick and to gain a cash infusion now, when we need it the most.” Steve didn’t like the idea of going for less than he thought we were entitled to earn. He felt this would be too much of a bargain for Microsoft and Silicon Graphics. Five million, or even $10 million, was nothing to them if they needed these patents. Steve wasn’t wrong; I just didn’t think going for too much was pragmatic. I was nervous about locking Pixar up in a protracted legal battle, even if we liked our chances of winning it. Patent licensing was not a business strategy for Pixar. It was a financing strategy, something we would do once or twice to bring in cash, but no more. It would buy Pixar time, not guarantee long-term success."

"A few days later Steve made me an offer to become Pixar’s executive vice president and chief financial officer, and a member of an Office of the President that he would create with himself as CEO, Ed Catmull as chief technology officer, and me as CFO. I asked Steve if I could have a day to think about it."

"Steve winced at this. He didn’t like it when I made any suggestion that Pixar might not be ready to go public. He was itching to go public as soon as we could. I had one foot on the brake, though. Pixar was frantically trying to finish Toy Story for its launch in six months. I didn’t want potential investors to see how precarious the project was. Worse, we didn’t have a business plan to confidently share with them, and I knew from my talks with Sam Fischer that Pixar’s share of the home video revenues under the agreement with Disney was very small, even if the market for home videos was big."

"It was on one of these walks that I brought up RenderMan. “So what you’re saying,” Steve said, “is that we’re hooked on the small amount of money RenderMan brings in, but it’s not helping us grow.” “That’s exactly what I’m saying,” I replied. Steve wanted to know more. “If RenderMan is the industry leader,” he asked, “and if studios need it so badly every time they make a film, why don’t we raise the price? Instead of three thousand dollars per copy, we’ll make it six thousand, or ten thousand. If they need it, they’ll pay.” That might be true if the studios needed RenderMan, but the problem was that, at least for most projects, they didn’t. “RenderMan might be the best software of its kind,” I replied, “but there are other options. They are radically inferior, but they are still options. Production budgets for computer-animated special effects are extremely tight. Unless it’s Steven Spielberg making dinosaurs for Jurassic Park, or James Cameron making cyborgs for Terminator, producers will simply live with lower quality.” Steve leaped ahead. “Are you suggesting we stop selling RenderMan?” he asked. “Maybe,” I said tentatively. It was a big decision, and an idea I didn’t want to push too hard right now. “My fear is that it’s a distraction. We use some of our best engineers to support customers. Maybe there are better things they can be doing.” The idea was to keep RenderMan for Pixar’s use and to drop the considerable effort Pixar put into selling RenderMan and supporting its customers. “Whatever we do with RenderMan, it’s not going to be relevant in any sort of growth strategy or public offering.”"

"I asked each member of Pixar’s senior team if I could follow them around for a while, literally shadow them, sit in meetings without participating, and ask them questions about what they did. I also asked for their permission to talk to the various individuals on their teams. Managers generally don’t like other managers snooping around their domains; my newness absolved me from that, at least temporarily. They all went along."

"“I’m not sure if going into live-action film gives us any advantages,” I said. “In animation we put all our eggs in one basket, and we watch it very closely. In live action we spread out the eggs over many baskets, hoping a few of them will hatch. Both businesses are risky. I’m not sure one balances or helps the other.” “It might even be the opposite,” Steve said. “If we have to release a slate of live-action films, what’s to stop the ones that flop from damaging our reputation in animation?” “That’s true,” I agreed. “Walt Disney only went into live-action film after he was established in animation.” “I hate the idea of Pixar releasing products that might not be great,” Steve added emphatically."

"This is also a story about how, through the eyes of a two-thousand-year-old Buddhist philosophy called the Middle Way, I came to see Pixar in a larger context. How I learned that the tensions at Pixar were the very same forces that lie at the heart not just of making great films, but of living great lives, building great organizations, and freeing our inner capacities and creativity."

"“As you know,” Ed said, “we’re making a feature film due out in November. We’re also selling RenderMan software and making commercials. But we don’t really have a business plan for building the company. We could really use some help sorting that out.” “How does Pixar fund its business now?” I asked. Ed explained how it was very much just month to month. Disney paid for film production costs while sales of RenderMan software and animated commercials brought in some revenues. That wasn’t enough to cover Pixar’s expenses, though. “How do you cover the shortfall?” I asked. “Steve,” Ed explained. “Every month we go to Steve and tell him the amount of the shortfall, and he writes us a check.”"

"This is the story of how the little company that made the world fall in love with toys, bugs, fish, monsters, cars, superheroes, chefs, robots, and emotions emerged from the forces at work beneath it. It is about the choices and the absurd bets and risks that made it possible. It is about the tension between creative integrity and real-world necessities, and how that tension shaped those involved with it—Steve Jobs; Pixar’s creative, technical, and production teams; and me. It is a story about what it means to put the creative impulse first, and why that is so very hard to do."

"“I still have questions about Pixar’s business,” I said. “The products, technology, and team seem amazing. But I’m not certain where the business growth comes from.” “That’s what we have to figure out,” said Steve. “Pixar has this amazing collection of talent, doing work that no one has seen before. Now it’s time to turn that into a business. I think you would be great for this. How about we get together and discuss you coming on board?”"

"During this interregnum, Steve Jobs asked me to fly up to San Jose so I could see a movie he was in the middle of making for this unknown company he’d acquired called Pixar. But first he wanted to show me what he was doing with a “revolutionary” computer system at another new company of his called NeXT. It hadn’t been going that well because its complex yet elegant design couldn’t find a market, given the absolute domination of Microsoft. I went to the NeXT office, where Steve showed me a few scenes from *Toy Story*, and asked if I would join the Pixar board. I said I’d have to think about it. I didn’t want to commit myself and didn’t want to insult him, but I’d never been much interested in animation and had never made any animated movies. I don’t really understand the form and I thought this new Pixar work was awkward, and, separating me from most of the world, I didn’t get any of the charm of *Toy Story.*"

"Neither NeXT nor Pixar proved to be good vehicles for Jobs. When he returned to Apple, he found a right mess; a whole series of projects and products, including the Newton handwriting recognition software, were loss-makers and cash-consumers. Apple had one product that was profitable and credible, the Macintosh. Jobs cut everything else, and then paused until his people created ‘the next big thing’, which proved to be the iPod and iTunes, and then all the delightful and simple new products they created. Apple had the DNA, and design capability, which Jobs greatly augmented, to go from strength to strength. Jobs took his rackety old vehicle, which was barely roadworthy in 1997, and endowed it with such a powerful new engine that it became for a time the most valuable vehicle in the world. The lesson? Don’t look for a new vehicle if the existing one has potential for success and can be radically reconditioned."

"Around the same time, Steve Jobs needed a head of graphics, as Apple sought to design its own chips for next-generation iPhones. He’d narrowed his sights to Bob Drebin, a former Pixar engineer who’d done pioneering work for Nintendo and been the graphics technology chief at AMD, a chip designer. When Jobs heard he’d entered early retirement, he called him up with a job offer. Drebin demurred, saying he wanted a year to spend time with family and focus on hobbies like sports photography. “Okay,” Jobs said, hanging up the phone. Three hundred and sixty-five days later, Drebin’s phone rang. “So, you ready?” Jobs asked. Drebin accepted."

"Previewing the action he would take at NeXT in 1993, Jobs took Pixar out of the hardware business. He cut staff by two-thirds and narrowed their efforts to storytelling. The result was a major deal with Disney, and out of that came *Toy Story*, the first feature-length computer-animated film and a smash hit at the box office. Jobs, who owned 80 percent of the company, took it public, and instantly became a billionaire. Its success reframed the public perception of Jobs."

"tri-partite leadership is challenging in the best of cases, but it worked at Pixar. As Pixar filmmaker Pete Docter told me: “Here there was a clear definition of power: John on creative, Ed on technical, and Jobs on business and financial. There was an implicit trust of each other, as well as one guy with the final word (Steve)."

"Our general term for this sort of barrier is “fiat”; it is not based on ongoing interaction but rather comes by decree, either general or personal. In a case of the cart driving the donkey, it was Lasseter’s commitment to Pixar that helped convince Katzenberg to do the three-picture deal with Pixar in 1991."

"This “Band of Brothers” later came to form the core of the group known as the Brain Trust, the creative cadre instrumental to the studio’s sustained success. This core group is the Factor X that lies at the heart of Pixar’s Power."

"Benefit. In the Pixar case, this resource produced an uncommonly appealing product—“superior deliverables”—driving demand with very attractive price/volume combinations in the form of huge box office returns. No doubt—this was material (a large m in the Fundamental Equation of Strategy). In other instances, however, the Cornered Resource can emerge in varied forms, offering uniquely different benefits. It might, for example, be preferential access to a valuable patent, such as that for a blockbuster drug; a required input, such as a cement producer’s ownership of a nearby limestone source, or a cost-saving production manufacturing approach, such as Bausch and Lomb’s spin casting technology for soft contact lenses."

"Barrier. The Barrier in Cornered Resource is unlike anything we have encountered before. You might wonder: “Why does Pixar retain the Brain Trust?” Any one of this group would be highly sought after by other animated film companies, and yet over this period, and no doubt into the future, they have stayed with Pixar. Even during the company’s rocky beginning, there was a loyalty that went beyond simple financial calculation. To illustrate: in 1988, long before Disney began its association with Pixar, Lasseter won an Academy Award for his Pixar short Tin Toy, prompting Disney CEO Michael Eisner and Disney Chairman Jeffrey Katzenberg to try to recruit their former employee back into the Disney fold."

"But there were also parts of Steve’s life he didn’t share. Steve had a way of separating the different aspects of his life, he alone holding the keys to every compartment. If you were in one compartment, you had little access to the others. As Steve’s celebrity status skyrocketed and he went on to meet leaders and celebrities from every corner of the world, I felt my own role in his life recede. But so long as his health was good enough, he would often meander over to my house to go for a walk or sit together. And I remained welcome to slip into the kitchen door of his house and walk to his room for a visit until the very end."

"When I joined Pixar, I was acutely aware of Steve’s reputation for harsh behavior—he was legendary for it—although I had never experienced it in our personal relationship. From the moment we met, our collaboration was always constructive and respectful, even when we didn’t see eye to eye. I could not recall an angry word between us. This did not mean I never witnessed Steve being ill mannered or dismissive of others. He could be unforgiving, with little tolerance for mistakes."

"“But if they say no,” Steve added, “it might poison the relationship, making the next two films harder to make.” “I hope it wouldn’t affect the film productions,” I said. “We have to keep the business and creative relationships separate.” “Let’s look at what we want if we do approach them,” Steve continued."

"Steve was now Disney’s largest stockholder, and the value of his stock in Disney would eventually soar to over $13 billion, making his investment in Pixar by far the largest source of his personal wealth."

"In contract negotiations, as in many other endeavors, the last 20 percent can take 80 percent of the effort. It is in the last 20 percent that the precise details are spelled out. One challenge is the inordinate amount of time spent on drafting contingencies that will likely never occur. For example, if an earthquake strikes Point Richmond and delays Pixar’s completion of a film, should Pixar be in breach of contract for delivering a film late? To what degree should Pixar be expected to protect against the risk of an earthquake? It’s actually not an unreasonable question, especially when making a film on the edge of the infamous San Andreas Fault. Or, if Disney and Pixar share the costs for buying computers to make films under the agreement, can Pixar use those computers for other, non-Disney projects? If so, should it reimburse Disney for that usage? Because it is possible to conjure up a virtually endless list of risks and contingencies, one of the marks of a good negotiator is knowing where to draw the line so that things can move forward. In negotiation, there is a constant tension between momentum and fear. It comes down to an exercise in risk management. One illustration of this idea came early in the draft agreement in a clause called “Treatments.” This provision said, simply, that for each picture under the new agreement Pixar would submit to Disney one or more film ideas in the form of a treatment. But what would constitute a treatment? Could it be one line on an index card: “A father goes on an adventure to find his son; oh, and they’re both fish”? That probably wouldn’t make the cut. So the agreement spells out the details: a written treatment less than three pages that can be the basis for a screenplay. But Pixar often presented its treatments orally, using sketches and short storyboards. What if that was the preferred method? The agreement needed to cover that possibility too. And Disney wanted to make sure that the treatments were for original stories, not sequels or prequels, so all that had to be defined."

"The solution was to find a way to diminish the risk that a small disappointment might cause the stock to plummet. There were two ways to do this. One was to use Pixar’s highly valued stock to purchase other companies. The effect of purchasing other companies would be to diversify from animation so that if animation experienced a downturn, it would not have as devastating an impact on the company. Diversification had been Walt Disney’s strategy all those many years earlier. The other way to diminish the risk was to seek a buyer for Pixar. If a large corporate conglomerate were to buy Pixar, Pixar’s stockholders would exchange their Pixar stock at its present soaring value for the stock of the larger corporation where they would enjoy much greater diversification. Over the years, Steve and I had speculated occasionally on how Pixar might ultimately end up being purchased by Disney, but we had never taken this on as a serious possibility."

"The Disney column now read: DISNEY NO OBLIGATION TO CHANGE CONTRACT CAN INVEST IN COMPUTER ANIMATION THEMSELVES OTHER PIXAR OPTIONS INFERIOR PIXAR ONLY ONE HIT ANIMATION MIGHT BE LOSING PRIORITY"

"Steve was thrilled about selling NeXT to Apple. NeXT had launched its first computer in 1988 but had failed to compete in the burgeoning market for workstation computers. In 1993 it had shut down its hardware business to focus on selling its operating system and development software. In selling the company to Apple, Steve had found a face-saving parking place for NeXT, and a chance to keep its advanced software technologies alive. It was no wonder he was excited about it. “NeXT’s software will be the core of a new-generation operating system for Apple,” he told me after the sale. “They really need it.” As Steve’s responsibilities at NeXT began to wind down, I wondered if his day-to-day involvement at Pixar might increase from the weekly visits that were now his custom. But nothing changed. Pixar was steadily working on A Bug’s Life and Toy Story 2 and putting the expansion plan into place. Steve seemed happy with the way things were working at Pixar and he showed no inclination to change"

"I felt Steve had been caught in a rare weak moment. This was more than four years ago, though. Steve liked to cite the adage “Fool me once, shame on you; fool me twice, shame on me.” What had occurred four years earlier was not going to happen again."

"“If Disney makes a substantial investment in computer animation,” Steve said, “they may have no interest in extending their agreement with us.” “Disney has plenty of resources to do it,” I added. “Plus they also have time on their side. Their deal with us could buoy them for a few years while they build up their own capacity in computer animation. We’re basically giving them the lead time they need.” This was a potentially perfect strategy for Disney. They could use Pixar to tide them over until they no longer needed us, reaping most of the profits along the way. Then they’d have their own computer animation capability ready to go and could easily jettison Pixar. “Another point for the Disney column,” I added, “is that Disney will undoubtedly think it offers Pixar more than any other studio can offer, given its expertise in animated films.” Steve wrote in the Disney column: OTHER PIXAR OPTIONS INFERIOR"

"When you added it up, there were many aspects of Pixar that had a big influence on Steve: becoming a billionaire, experiencing a stellar comeback in the eyes of the public, learning the ins and outs of the entertainment industry, enjoying a transformed relationship with Pixar, and bringing both business and creative imperatives into harmony. Combined with Steve’s aesthetic genius and product vision, these influences made for a very potent force as he jumped into the vortex at Apple. Indeed, Pixar may have been an interlude in Steve’s journey—one that remains the source of most of his wealth—but without Pixar one could make a case that the revolution ushered in by Steve’s second act at Apple might never have occurred."

"Disney was clearly better at distributing animated feature films than anyone else. It had extraordinary merchandising capability for churning out toys, clothes, and other branded items; it had the very best theme parks for showcasing the films and their characters; and the imprint of the Disney brand on an animated film gave it a cachet that no other studio could provide. Where else could Pixar find that kind of distribution clout? Disney might well conclude that Pixar needed Disney far more than Disney needed Pixar, and they might be right. It would certainly diminish our leverage with them."

"STEVE JOBS IS BACK IN THE SADDLE AGAIN, BECOMING A BILLIONAIRE IN PIXAR IPO The article said: There are plenty of analysts who think the market’s valuation of Pixar, at a total of $1.46 billion, is a sign of investors gone mad. Disney will get 80% to 90% of the revenue from “Toy Story,” and has locked Pixar into a three-picture deal through at least 1999 that promises to be a lot more rewarding for Disney than Pixar.5"

"I had left my day-to-day role as Pixar’s CFO in April 1999. I took a sabbatical to pursue a series of personal interests that eventually led me in some new directions. At that time Steve asked me to join Pixar’s board of directors. As a director, it was my job to look out for Pixar strategically, similarly to the way I had always done. Consistent with the USA Today column, and despite Pixar’s unprecedented success, in 2005 I found myself once again worrying. The laws of physics suggest we cannot go in one direction forever. Sooner or later, something will slow us down. Whether it be stocks, housing prices, economies, or entire civilizations, even the biggest booms stall. We build castles, churches, and monuments believing they will last forever; our perception of solidity often belies an underlying movement that is difficult to perceive. Sometimes we can see the wave of change coming. But more often we are swept along in it. In my mind, Pixar was facing such a wave. When a company’s stock price goes up and up on the strength of its business growth, the first sign that its rate of growth is slowing can create enormous downward pressure on its stock price. Pixar’s last two films, The Incredibles, released at the end of 2004, and Finding Nemo, released in the summer of 2003, had been Pixar’s biggest films to date. Finding Nemo had taken in almost $1 billion worldwide. These films had enjoyed heights of success so dizzying that I feared the slightest hint of a slowdown would send Pixar’s stock tumbling. As the USA Today article had described, this had already happened on the news that DVD sales might be slowing down. The stock had recovered, but the evidence was strong that it was in rarefied air, made even thinner by Pixar’s continued dependence on blockbusters. One small slip and the danger of a big fall was high. This would hurt not just Pixar’s stockholders but the company as a whole. Shareholder cries for change can create enormous pressure on a corporation. It was better to be on top of it."

"There was another column, though. The first thing Steve wrote in the Pixar column was: IPO $ TO PAY FOR PRODUCTIONS “We can now pay for our own productions,” Steve said. “Disney doesn’t have to pay for all the costs.” This was why we had done the IPO. If money talked, we now had quite a bit of it. We anticipated that production costs for Pixar’s next film might approach $50 million, and production costs for future films more still. If we offered to put up half of it, this would surely get Disney’s attention. Then I added a second point: TOY STORY SUCCESS Steve wrote it in the Pixar column. “No one expected Toy Story to be so successful,” I said. “Least of all Disney.”"

"Steve wrote in the Pixar column: DREAMWORKS THREAT TO DISNEY Then Steve made another entry in the Pixar column: BETTER DEAL IF WAIT"

"“We have a chance to make this happen,” I said to Hillary one night toward the end of August. “I’ll be out of commission working on this for the next couple of months. But this is our shot.” “Steve’s ready for it too?” Hillary asked. “Yes, he’s on board. Ready to go. Even excited I would say.” “Good luck,” Hillary said. “This is the chance you’ve been hoping for.” We’d need that luck. Actually pulling off an IPO was going to be a lot harder than finding investment banks. We would now begin endless meetings with the bankers as they pored over every single detail of Pixar’s history, financial information, and business plan. There would be teams of lawyers and accountants checking, double-checking, and triple-checking compliance with every nuance and requirement of the securities laws. There would be continuous discussions and debates over how to value Pixar, how to price its stock, and the exact timing for taking it public."

"Most of all there would be the crafting of the document around which the entire transaction would pivot: Pixar’s prospectus. This mind-numbingly detailed legal document would be filed with the SEC and then delivered to every potential investor. The prospectus would disclose in painstaking detail every facet of Pixar’s business, qualitatively and quantitatively, and would contain page after page of discussion of the risks that every investor should know about. It would describe Pixar’s history, vision, business plan, technology, animation and production processes, competition, risks, executives, board members, stock ownership, stock option plan, and countless other details relevant to understanding the company. It would be as long as a book and take many weeks and many nights in a room full of investment bankers and lawyers to craft its every word. After that, it would be subject to the comments of the SEC to which we would have to respond in detail. If anyone along the way—investment bankers, lawyers, accountants, or the SEC—was not happy with that prospectus, there would be no public offering."

"We could see our symbol PIXR for the first time. We were live. Pixar was a public company. But the trading did not begin at $22. That was the price the first investors paid to Pixar to acquire the stock. It immediately jumped up into the high thirties. Demand was off the charts. We all stared at it, partly beaming, partly in disbelief. Todd Carter broke the silence. He turned to Steve. “Congratulations, Steve,” he said. “You’re a billionaire.” At the end of the first day’s trading, Pixar’s stock was at $39. That gave Pixar a market value of close to $1.5 billion and did indeed make Steve a billionaire. I later heard that while I was glued to the computer screen watching Pixar’s trades, Steve had stepped into a nearby office and made a phone call to his friend Larry Ellison, the founder and CEO of Oracle Corporation. All he apparently said was “Larry, I made it.”"

"Culture is the invisible force on which innovation depends. We like to pin the mantle of invention on individuals, not circumstances. We anoint heroes and tell their stories. Yet innovation is a collective undertaking. It is as much the product of circumstance as of genius. There is a spirit to it. Preserving that culture and spirit at Pixar was very, very important. Indeed, I had been brought into Pixar as a change agent. My job was to shake up the company and usher it into an era of commercial success and viability that it had never experienced. How could I know that the changes I was sent to make wouldn’t end up destroying the culture on which Pixar depended to innovate?"

"The meetings went off without a hitch. Steve did a fantastic job mesmerizing Quattrone and Martin over Pixar’s potential. They could hardly have been more enthusiastic about the vision and strategy. They understood Pixar was not the typical Silicon Valley tech company, and both said they wanted to involve their entertainment specialists in LA. Even the discussion over Pixar’s risks had gone well."

"What this indicated, surprisingly to me, was that the hotbed of creativity that was the supposed hallmark of Hollywood was not all it was cracked up to be. It was much harder than I thought for the studios to take big risks and to innovate. They seemed to trade more on certainty and copycatting than risk. This meant that if Pixar were to raise its flag as an entertainment company, it would have to avoid the Hollywood habits that stifled innovation. If Pixar traded its familial and informal culture for one based on control and celebrity, it could lose the freshness and spirit on which it depended. Maybe my grumbling about Pixar’s lonely outpost in Point Richmond, California, was misplaced. Perhaps it was a good thing, making it easier for Pixar to forge its own way."

"Carrying costs are the costs of paying employees when they are not working on films. When animation finished on Toy Story, for example, Pixar still had to pay its animators even if it had nothing for them to do. I was learning that carrying costs could drain a little company like Pixar of all profitability. It was a problem that had dated all the way back to the time of Walt Disney, and one of the reasons it was so difficult to go into animation. This problem did not exist in live-action film because the crew making the film, from the producer and director to the film’s stars, to the cameramen, extras, and everyone else, comes together for the sole purpose of making the film. They are paid only during the time they are involved. As soon as that ends, they all disperse and there is no further obligation to pay them."

"Joe was immediately warm and friendly. He was a few years our senior, soft-spoken, casually but well dressed, with a warm and gracious smile and graying hair. We began by describing what we were up to at Pixar. After a few minutes, a phone rang in the corner of the room behind Joe’s desk. “Excuse me,” Joe said, “I’m terribly sorry. I need to take that call, but it won’t take long. Please stay and be comfortable here.” Joe spent a few minutes on the phone by the window at the other end of his office. Then he returned to us. “So sorry to have to take that call,” he said. “It was Robert Redford. He’s not easy to reach. There won’t be any more interruptions.” As soon as we left the building, Steve and I tried to keep our cool, but we both had one thing on our minds. “Robert Redford!” Steve exclaimed. “Butch Cassidy! The Sting! I wouldn’t have kept him waiting either. Wow!” “I know,” I said. “That’s about all I could think about the rest of the meeting!” “Me too,” said Steve. We were starstruck! It would be a few years yet before Steve had access to every celebrity in the world, but in this moment, we were more like teenagers glimpsing stars on the red carpet."

"“Will they take third position on the deal?” Steve asked. “I’m pretty sure they will,” I replied. It was fairly typical to have three investment banks involved in an IPO. There was no magic number. Some IPOs used two investment banks; some used four or more. It depended on the size of the offering, access to investors, and the need for specialized industry expertise. The Pixar shares sold in the IPO would be allocated among its investment banks. Giving Cowen third position meant that they would have the smallest allocation, which made sense because they would likely have a smaller roster of clients who invested in IPOs. “If they’ll take third, it’s okay with me,” Steve said. “We’ll still need someone else in second position.” I was more than pleased. I was sure Cowen and Company would go for it. It meant that Hal Vogel would be Pixar’s analyst. Lightning had struck again."

"But I had examined this from every angle I could imagine. Fully committing Pixar to becoming an entertainment company focused on animated feature films was our only shot. Steve, Ed, and I were all on board with it. This was our mountain to climb, no matter how steep or far away the summit. With much weighing on my mind, it was time to begin the ascent."

"As we often did, we wrote down the main points of discussion on a whiteboard. There was one in the front of the room, with a wooden casing around it. We had discussed all of these points before, but it was helpful to see them in one place. Steve took a whiteboard pen and made two columns: Disney and Pixar. Under the Disney column, he would write the points that gave Disney leverage. Under the Pixar column, he would write the points that favored Pixar. Point one for Disney: NO OBLIGATION TO CHANGE CONTRACT “We know there’s nothing that can force Disney to negotiate with us,” Steve said. “They have a three-picture deal and they can stick to that contract simply because they want to.” “They have us tied up for two more films,” I added. “They keep most of the profits, and we can’t talk to any other studios until we’re done. It’s a great deal for them. Why would they change it?” Steve added a second point in the Disney column: CAN INVEST IN COMPUTER ANIMATION THEMSELVES"

"QUADRUPLE OUR SHARE OF THE PROFITS RAISE AT LEAST $75 MILLION TO PAY FOR OUR PRODUCTION COSTS MAKE FILMS FAR MORE OFTEN THAN WE KNEW HOW BUILD PIXAR INTO A WORLDWIDE BRAND"

"Finally, if Pixar was to become a serious entertainment company, we needed people to know about us. Under the terms of the Disney agreement, Disney would have most of the billing, and we feared that few people would understand that Pixar was the creative force behind its films. As it was, the movie posters for Toy Story would say, “Walt Disney Pictures presents Toy Story,” or worse, “Disney’s Toy Story,” with Pixar’s name in small print. This would make it hard for the world to fully associate Pixar with filmmaking. “We have to change how the world perceives Pixar,” Steve said one evening when we were discussing Pixar’s brand. “Even if Disney gets the billing, people need to know that we made these films. We can’t build a company without a brand.”"

"That was certainly a true statement, but it wasn’t the answer I was looking for. Of course we’d be free after the three films, but that was still years away. I wanted to ask Steve why he let Pixar enter such a one-sided contract, why he didn’t tell me it was so constraining, and why he seemed so nonchalant about it. But I didn’t. As we sat there talking, I realized Steve had no interest in looking back. He didn’t defend the contract. He didn’t justify it. He listened carefully to everything I had to say about it, taking it all in. That was pretty much it."

"“You know,” I said, “in all my conversations with Steve these past two months, I’ve never found him defensive. I’ve critiqued and dismantled every aspect of Pixar’s business and he had every reason to justify and defend it. But he didn’t. Not once. It’s as if he’s taking this journey with me, learning it at the same time I am.” “He hasn’t given you a reason to distrust him,” Hillary said. “You two are in this together. You have to work it out together.” That’s how it felt. Whatever mess we were in, we were in it together. What mattered was our next move."

"Pixar’s revenues from animated commercials were small, and profits almost nonexistent. The division would have to scale by a huge factor, and become much more profitable, to make a meaningful contribution to the company’s bottom line. Based on what I’d learned, this was all but impossible. Once again, Pixar was committing its talent to an endeavor that would never go anywhere. It might keep a small, talented group busy, but as a strategy for growing a company, animated commercials was another dead end. With little promise in RenderMan and animated commercials, the options for growing Pixar’s business were diminishing, and my level of worry was on the rise."

"“Pixar’s an enigma,” I shared with Hillary one night after dinner. “I don’t think I’ve ever seen so much talent under one roof. Their efforts have been nothing short of heroic, but every business it has tried has either failed or has such limited potential it’s hardly worth the effort. It’s just running in place.” “If nothing’s worked, how did it survive this long?” Hillary wondered. “I suppose it comes down to Steve’s stubbornness,” I replied. “I don’t know any other investor who’d have stuck it out this long. But I know even he’s had his doubts. He’s got nearly fifty million in Pixar and very little to show for"

"This was the first example of a pattern I would experience often with Steve. He would debate with intensity over any issue we were discussing, big or small. Sometimes we agreed; sometimes we didn’t. When we didn’t, I would find myself having to stand resilient, steadily holding to my position, yielding not to his intensity but to the merits of the matter. Time and again, I saw how Steve preferred that we come to a mutual resolution, marching forward together, rather than acting on an outcome that he imposed. Years later Steve told me he felt the business and strategic choices we made at Pixar were neither his nor mine but the product of just this process."

"We still needed a business plan, however, a road map to give Pixar a shot at success no matter how improbable. After examining a seemingly endless number of permutations, the plan we finally developed had four pillars. First, we had to increase Pixar’s share of the profits from our films. There was no scenario in which Pixar could become a viable business under the profit-sharing arrangement in the existing agreement with Disney. We tested many possibilities and concluded that the minimum profit share that Pixar would need to achieve its goals was 50 percent. Therefore, the first pillar of our plan called for increasing Pixar’s share of the profits to at least 50 percent, which was a four-or fivefold increase over what we had now. Next, to have any real shot at increasing our share of film profits, Pixar had to be willing to pay all, or a large part, of the production costs of its films. We had learned how Hollywood ran on essentially two currencies: money and star power. Either one was a ticket to bigger opportunities, bigger profit shares, and more clout. Those who didn’t have either remained at the whim of those who did. If we were ever to renegotiate our agreement with Disney, or work with any other film distributor when that agreement was over, to begin any conversation about a bigger share of the profits we had to be prepared to pay the production costs of our films. I discussed this with Steve one Friday when he was at Pixar. We were in his office, just down the hall from mine. “How much do you think we will need to raise?” Steve asked. “At least seventy-five million dollars,” I said. “Competition for talent, carrying costs, and increasing technical challenges are driving production costs up. It won’t be long before our budgets hit seventy to a hundred million per film.” “Will seventy-five million be enough?” Steve wondered. “It would let us finance half the production costs on two films,” I said. “That should be enough to get us started. That’s no small sum, though. It’ll scare away banks and private investors. We can only raise that much by taking Pixar public.” “Maybe we need more. It would be better to have a cushion of a hundred and fifty or two hundred million. Once we’re raising money, we might as well have a big war chest.” I certainly had no objection to raising more capital for Pixar. But our chances of raising money went down the larger the amount we sought. For an unproven company like Pixar, investors would prefer to see us put smaller amounts of money to good use before they ponied up more. This wasn’t the time to debate that, though. Steve and I agreed on the second pillar of Pixar’s plan: take Pixar public to raise money in order to build the studio and to fund our own films. Increasing our share of film profits and raising money wouldn’t be enough, though. We also had to increase the frequency with which Pixar released films. We were presently making one film at a time, which meant a film release every four to five years. There was no way to make the business work at this rate. Again, we tested different scenarios. The ideal rate of film releases, at least according to the numbers, was a new film every year. That seemed far out of reach from where we stood now, but any meaningful increase in how many films we produced would require a drastic increase in the size of Pixar so we could work on productions in parallel. Therefore, scaling Pixar to make films more often was the third pillar of the plan."

"But it was the stock options that bothered me the most. Many of Pixar’s employees had staked their entire careers on Pixar, had given it the best years of their professional lives. What kept them there? What kept them from jumping ship for more lucrative opportunities? I reasoned that it could only be because they were passionate about Pixar. Despite all the years of commercial failure, they believed in the potential of their own work, and they wanted to see it through. We could not rely on that for much longer, though. They now needed to be rewarded for it."

"The strategy ended up working. It took three months to conclude the Microsoft license and about a year to conclude the Silicon Graphics license. Microsoft paid $6.5 million and Silicon Graphics a bit more, plus it gave credits for Pixar to acquire the Silicon Graphics computers it needed to make films. Pixar got just the shot of cash it needed, and Steve was happy. It meant that, for the first time, he would not have to pay Pixar’s cash shortfalls out of his own pocket for a while. It wouldn’t last forever, but it gave us room to figure out our long-term strategy."

"We walked the Robertson Stephens team through the details of Pixar’s vision, business plan, and risks. We told them we were aiming to change entertainment history in a way few companies had ever had a chance to do, and we described the four pillars it would take to make it work: raise the money to finance our films, expand the studio to handle more productions, make Pixar a worldwide brand, and increase our share of film profits. But there were risks. Big ones. Wall Street would have to understand that. “Thank you,” Brian said sincerely. “This has been immensely helpful. Give us a couple of days. We’ll be back to you.” Later that day I received a call from Todd Carter. He thanked me for the meeting and wanted to explain the process by which they would make their decision. “The decision is made by our Commitment Committee,” he said. “That comprises all our top people and they make the final decision on every deal.” “Any idea how it looks for Pixar?” I asked him. “I wish I could say,” Todd replied. “You’re very aware of the challenges in Pixar’s business model. We’re excited about Pixar, we love the vision, but we have to be certain our investors can tolerate the risks. My personal recommendation is that we go for it, but it isn’t my decision. I think it’ll be close.” There wasn’t much there to make me feel comfortable. I could only sit and wait. It was hard to be patient, though. I hadn’t expressed it to Todd, but by this point I was flat out of options. If Robertson Stephens’s committee voted thumbs down, our chances of an IPO anytime in the near future would truly evaporate. Two days later Brian Bean called. “Our Commitment Committee made its decision,” he started. I held my breath. “We’re in,” Brian told me. “We think our investors will go for this. We know we have to get them on board for the long term, but there’s enough that’s exciting here that we think they will. We’d be honored to be the lead banker for Pixar’s IPO.” I put down the phone with a lump in my throat. Lightning had struck. This was huge. My first call was to Steve."

"“Plus,” Pam added, “he’s broken promises. And people are angry about that.” “What promises?” I asked. “Stock options. He promised them to us, and they’ve never materialized. Perhaps part of your job is to fix that, but every day that passes without a solution, people grow more cynical. Many here have been waiting for years to own a little piece of Pixar. All their friends at other companies have been rewarded, and now they’re frustrated. They feel used. It’s not going to be easy for you to win their trust.”"

"“Steve is the guy who owns us—but he’s never been one of us,” Pam explained. “We’ve long felt unvalued, unappreciated. People worry that if he gets too close, he’ll ruin Pixar and destroy our culture. And now, you’re the guy he has sent to whip us into shape.”"

"The impact of all these contractual provisions was crushing: until Pixar could release a film outside of the Disney contract, the most we could expect to earn from our first three films would be a few million dollars a year—and even then, only if those films ranked with Disney’s most profitable films ever. No one would invest in a company that had to perform at those levels in order to eke out a small profit. “Sam, did no one at Pixar understand these calculations?” “I’m quite sure Steve did,” Sam told me. “We walked him through all the terms and what they meant.”"